GASB 87 Exclusions: Short-Term, Intangible, and Supply Contracts

GASB Statement No. 87 pulls most government leases onto the balance sheet, but several categories of arrangements fall outside its scope. The GASB 87 exclusions cover short-term leases, leases of intangible assets, biological assets and inventory, contracts that transfer ownership, supply contracts, service concession arrangements, and leases of assets financed with outstanding conduit debt. Lessors get two additional exceptions for investment assets and certain regulated leases, and inter-entity leases involving blended component units are handled outside the standard’s normal recognition model.¹ Each exclusion has its own test, and getting the classification wrong changes both the balance sheet and the pattern of expense recognition.

Short-Term Leases

This is the exclusion governments reach for most often. A short-term lease has a maximum possible term of 12 months or less at the start of the lease, including any options to extend, regardless of whether the government expects to exercise them.¹ The test is bright-line. A one-year lease with a single one-year renewal option fails because the maximum possible term is 24 months. A six-month lease with a seven-month renewal option fails because the total reaches 13 months.

The “maximum possible term” calculation assumes every extension option the government controls will be exercised and every termination option will not be. For cancelable arrangements such as rolling month-to-month or year-to-year leases, the maximum possible term is the noncancelable period plus any required notice period. A three-year lease the government can cancel after 11 months qualifies as short-term because the government holds that termination right.¹

Short-term leases stay off the statement of net position. Payments are recognized as expense or expenditure when due, with a prepaid asset for advance payments and a liability for rent owed after the reporting period. No expense is recognized during a free-rent period.¹ The notes to financial statements still must disclose total short-term lease expense for the period.² A government can apply the short-term classification on a class-of-assets basis — treating all vehicle leases or all office equipment leases as a group — rather than evaluating each lease individually.

Leases of Intangible Assets

Paragraph 8 removes intangible asset leases from the standard entirely. The exclusion specifically names rights to explore for or exploit natural resources such as oil, gas, and minerals; licensing contracts for films, video recordings, manuscripts, patents, and copyrights; and licensing contracts for computer software.¹ These fall under other GASB guidance, including GASB Statement No. 51 for traditional intangible assets and GASB Statement No. 96 for subscription-based information technology arrangements like cloud computing contracts.³

One important carve-back: sublease transactions. When a government originally leases a tangible asset and then subleases the right to use that asset, the intangible right-to-use asset created by the original lease stays within GASB 87’s scope.¹ A government that leases a building and then subleases space to a third party cannot use the intangible exclusion to avoid lease accounting for the sublease.

Biological Assets and Inventory

Leases of biological assets — timber, living plants, and living animals — are excluded, as are leases of inventory.¹ A government that leases grazing rights for livestock or timber harvesting rights on public land accounts for those arrangements under other existing governmental accounting principles rather than capitalizing a lease liability.

Contracts That Transfer Ownership

A contract that transfers ownership of the underlying asset to the government by the end of the term, and does not include a termination option other than a fiscal funding or cancellation clause that is not reasonably certain to be exercised, is not a lease under GASB 87. It is a financed purchase.¹ The government recognizes the asset and a corresponding debt obligation immediately, just as it would for any installment purchase.

The distinction has real consequences. Under a financed purchase, the asset goes on the books at full value and is depreciated like any other capital asset. Under GASB 87, the right-to-use asset is amortized over the shorter of the lease term or the asset’s useful life. The classification changes both the balance sheet presentation and the pattern of expense recognition over the asset’s life.

Supply Contracts

Supply contracts fall outside the standard because they give the government access to the output of an asset rather than control over the asset itself. Power purchase agreements are the most common public-sector example.¹ A government contracting for a specified amount of electricity does not control the power plant. The vendor decides which generators to run, how to maintain them, and when to dispatch power. The government receives kilowatt-hours, not the right to use specific turbines.

The same logic applies to managed print contracts, data center hosting arrangements, and similar deals where the government pays for a volume of service rather than controlling an identified asset. The test comes back to control: does the government direct how the asset is used, or does the vendor?

Service Concession Arrangements

Agreements that meet the definition of a service concession arrangement under GASB Statement No. 60 are excluded from GASB 87.¹ In a typical service concession arrangement, a government grants a private operator the right to operate a public asset such as a toll road, parking garage, or convention center and collect user fees for a defined period. The operator usually commits to maintaining or improving the asset in exchange for that revenue stream. These arrangements have their own accounting model and do not run through the lease framework.

Leases of Assets Financed with Conduit Debt

A lease is excluded from GASB 87 when the underlying asset is financed with outstanding conduit debt, unless the lessor reports both the asset and the conduit debt on its own financial statements.¹ Conduit debt is issued by a government on behalf of a private entity, with the private entity responsible for repayment. Applying GASB 87’s lease model on top of an existing conduit debt arrangement would create duplicative reporting, with the asset and obligation effectively appearing twice. The exclusion only applies while the conduit debt remains outstanding.

Lessor-Only Exceptions

Two additional exceptions apply only to lessors. They do not remove the arrangement from GASB 87 entirely. The lessee side still follows the standard’s normal recognition and measurement rules.

Assets Held as Investments

Paragraph 41 excludes leases of assets that are investments from the lessor’s recognition and measurement requirements.¹ When a government holds real estate or other assets primarily as investments rather than for governmental purposes, the lease receivable and deferred inflow model does not apply to the lessor. Investment accounting already captures the economic substance.

Certain Regulated Leases

Lessors also receive an exception for certain regulated leases.² This applies when an external body, such as a federal or state regulatory agency, dictates the pricing structure of the lease. Airport gate agreements and port authority leases with federally mandated fee structures are common examples. When a lessor cannot determine the nature and amount of lease payments because an outside regulator sets the terms, the standard’s normal lessor accounting does not fit. The lessee in these arrangements still follows GASB 87 as usual.

Leases Involving Blended Component Units

GASB 87 handles inter-entity leases differently depending on the relationship. When the lessee or lessor is a blended component unit of the primary government, the standard’s normal recognition requirements do not apply. The lessor’s capital assets and related debt are reported as if they belonged to the primary government directly, and required eliminations happen before the blended component unit’s statements are combined with the primary government’s.¹

Lease arrangements between the primary government and discretely presented component units are not excluded. They follow the standard’s normal rules like any other lease.¹ Blended component units are so closely integrated with the primary government that applying lease accounting between them would produce artificial assets and liabilities. Discretely presented component units operate with enough independence that the lease framework captures a genuine transaction.

1
Governmental Accounting Standards Board. Statement No. 87 – Leases
2
Governmental Accounting Standards Board. Summary – Statement No. 87
3
Governmental Accounting Standards Board. Summary – Statement No. 96